Stock Market Internals Earnings Momentum, Small/Mid/Large Caps, Growth/Value/Cyclicals, and Additional Factors
Eye on Earnings
With the first month of Q3-22 earnings in the books, our Up/Down ratio is 1.42, which is markedly better than the first two quarters (1.09 each). However, given falling estimates, the latest uptick probably isn’t the start of something bigger.
Small Cap vs Mid Cap vs Large Cap
Our Ratio of Ratios had a slight rebound from September’s contemporary lows. The October bounce was more pronounced in Small Caps, as that flavor of equities had its best monthly performance, relative to Large Caps, since February.
Growth vs Value vs Cyclicals
Our best-performing style box in October, Royal Blue Value (+14.2%), clawed its way into positive territory (+0.8%). All five of the other style boxes are trailing RB Value by 12-32% YTD.
Additional Factors
Value stocks have had incredible performance relative to Growth. At the end of October, IVE (iShares S&P 500 Value) had a 20% YTD advantage over IVW (iShares S&P 500 Growth). That’s easily the largest annual performance gap in favor of Value: Over the 22-year history of data, no other year reached double digits.
Earnings Momentum
With the final month of Q2-22 earnings complete, our Up/Down ratio reads 1.02. That is very close to the 1.05 ratio for Q1. Both readings fall below the vignette’s recession threshold of 1.07 (in the past 39 years, all readings below that mark were accompanied by an “official” economic recession).
Small Cap vs. Mid Cap vs. Large Cap
This is the lowest relative valuation registered for Small Caps since May 2020. The end of September also marked the lowest absolute trailing valuations for both Large Caps (20.7x) and Small Caps (15.0x) in our L3000 universe looking back to April 2020.
Growth vs. Value vs. Cyclicals
More pain for our Royal Blue Growth segment (Large Growth proxy). Q3 performance (-6.9%) was the worst for our style boxes and contrasted against the other Growth boxes (SC Growth +0.2%, MC Growth -0.6%).
Additional Factors
The S&P 500 pegged its third consecutive quarterly loss, a remarkable feat for the Index. It hadn’t produced back-to-back quarterly losses (total return) since the Great Financial Crisis. Investors opening their quarterly statements in the next week or so, accustomed to a sharp reversal of losses like those in 2011, 2015, 2019, and 2020 may be in for a surprise.
Earnings Momentum
With the second month of Q2-22 earnings in the books, our Up/Down ratio is 1.04; levels this low have always been accompanied by an economic recession. It’s hard to make a case why this go-round would be any different.
Small Cap vs. Mid Cap vs. Large Cap
Like puka necklaces and Ska music, Small Cap stocks are having a hard time coming back into favor. Our Ratio of Ratios has been below its median premium for almost four years. A near-term recession may push this relationship even lower, initially, but could provide a catalyst to return to a more “normal” figure.
Growth vs. Value vs. Cyclicals
After surging in July, our Royal Blue Growth segment (-6%) led all other style boxes in August. Since the end of November 2021: Royal Blue Growth = -28%, Royal Blue Value = +3%.
Additional Factors
The back end of August saw the S&P 500 give up about half of the 17% gain achieved from June’s closing low. The nine week bear-market bounce was fairly uniform across the major indexes: S&P 400 +19%, S&P 600 +19%, and the Nasdaq Composite +23%. Over the course of the bounce, impressive gains from AAPL +33%, AMZN +40%, and TSLA +44% accounted for roughly a fourth of the S&P 500’s advance.
Earnings Momentum
With the first month of Q2-22 earnings in the books, our Up/Down ratio is 1.09. This figure lands in the fifth percentile of observations for our 39-year history and nearly matches the “one-month” reading of Q1.
Small Cap vs. Mid Cap vs. Large Cap
Our Ratio of Ratio’s contemporary peak (Feb. 2021) of an 8% Small-Cap discount unsurprisingly coincided with a relative strength top in the Russell 2000. Over the ensuing 17 months, the Russell 2000 posted a 13% decline compared to an 11% advance for the S&P 500.
Growth vs. Value vs. Cyclicals
Growth stocks staged a modest rebound in July but still trail Value YTD, most notably in our Royal Blue segments. RB Value (-3.1%); RB Growth (-24.6%).
Earnings Momentum
With the final month of Q1-22 earnings in the books, our Up/Down ratio is 1.05. We should note that this depressed level has preceded or accompanied every recession in our 39-year data set.
Small Cap vs. Large Cap vs. Mid Cap
Our Ratio of Ratios ends Q2 with the largest Small Cap discount since May 2020. From the start of the year, on an absolute basis, the Large Cap P/E ratio moved from 28.7x to 22.0x; the Small Cap multiple declined to 16.2x from 21.6x.
Growth vs. Value vs. Cyclicals
The brutal first half for Growth stocks has valuations approaching their 40-year average, while Small Cap Growth continues to feature a steep discount to that.
Additional Factors
The first six months of 2022 have been unpleasant for risk indexes of every stripe. The S&P 500 (World’s Reserve Index) returned almost precisely -20% and its constituents lost $8.45 trillion in market value. Poof, gone. Similar first-half losses by the S&P 400 (-19.5%) and the S&P 600 (-18.9%) resulted in paper forfeitures for its member firms of “only” $518 billion and $221 billion, respectively.
Earnings Momentum
With the second month of Q1-22 earnings in the books, our Up/Down ratio is a very weak 1.06. Even if we are nearing a cycle peak, the level of earnings is still impressive. S&P 500 four-quarter trailing earnings are now 34% higher than the previous peak just three years ago.
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